eCommerce Is Killing Retail, But Where Does That Leave Landlords? We Asked a Shopping App CEO

by | BiggerPockets.com

Times have been tough for retail landlords in recent years, as retailers are filing bankruptcies at a blistering pace. And it’s not just mom-and-pop stores that are folding — this trend is led by iconic brands like Toys “R” Us.

On the property-owner side, real estate moguls and market experts have declared retail all but dead, though in less PG-13 terms. Even prime strips in New York City are finding it hard to lease out their spaces.

Meanwhile, online shopping has skyrocketed, turned one web guy into a centi-billionaire, all the while putting big brands (like Toys “R” Us) out of business. And experts expect the so-called “retail apocalypse” to continue.

Why? According to Forbes, mainly because big retailers have failed to embrace “digital transformation.” (Here’s a more thorough report from Cushman & Wakefield that looks at eCommerce’s impact on commercial real estate.)

Retail of the future: 150+ startups transforming brick-and-mortar retail.

According to this infographic, more than 150 startups (as of 2017!) have raised funding—all in an effort to either transform, disrupt, or outright replace brick-and-mortar as we know it.

Apps like Wish — one I didn’t even know existed and which, for the record, thinks it will be bigger than Walmart) — is now worth more than J. C. Penney, Sears, and Macy’s combined. And others are hitting the market, with one after another raising millions, and some even selling for billions.

To get some insight on the trend, I sat down with New Jersey–based investor and entrepreneur Ali Mahvan, who recently launched Sharebert, a Tinder-style app that pays users to swipe and share purchases on their smartphones.

Despite its young age and a modest $3 million valuation (pre-money), Mahvan’s startup has racked up deals with 15,000 retailers to date. “We want to take out brick-and-mortar as we know it,” he says.

Philip Michael and Sharebert founder Ali Mahvan at Microsoft’s Times Square office. Photo Credit: Mugabe Woodside/Instagram @baswoods

But where does that leave landlords? Can both survive? Or will one have to bite the dust? I asked him this (and more). Read on.

The Future is Digital

BiggerPockets: You’ve set a bold goal with Sharebert. Why are you so bullish about online shopping?

Ali Mahvan: Convenience. People only do things that are totally convenient. It’s the reason you’ve spent literally hundreds of dollars over the past few years at that filthy gas station or convenience store near your home or office. We’ve all done it. It’s the reason Sears, Macy’s, and J. C. Penney are sinking in a mountain of debt and fewer people are out shopping in malls. Everything you could buy at the mall and more can be bought online and delivered directly to your home.

Online isn’t a new trend by any means. Internet entrepreneurs have been hitting home runs since the ’90s. Everyone’s heard of Jeff Bezos. Startup Zulily sold for [$2.4 billion] and is one of the 20-largest retailers in the world. Most people have never heard of Wish, but it’s worth more than $10 billion — more than Macy’s, Sears, and JC Penny combined.

The future of all commerce is e-commerce, which is now quickly becoming M-commerce—mobile online shopping. Hence the existence of Sharebert. We wanted to fuse those two industries together.

What does your app do?

The vast majority of people have their phones with them at all times, and more and more people are flocking to shopping online. That said, shopping on your phone is actually pretty annoying in most cases. Text and images are small, loading times are longer. The process is just annoying — especially if what you’re looking for isn’t readily available on the first site or app you open.

We try to solve all of these problems. For one, the more you use it, the app learns what you like and will recommend that to you. Secondly, all of the products from every major retailer on the internet are found in Sharebert’s app, companies like Amazon, Walmart, Best Buy, Disney, GameStop, Carhartt, Hotels.com, and tons more.

Lastly, we give users points, similar to credit cards — which can be traded in for products — just for using the app. In essence, we’re paying users to window shop. But in a Tinder-style format with swiping.

A Lifeline for Brick-and-Mortar Retailers

Online shopping apps — including yours — have effectively declared war on brick-and-mortar retail. That’s bad news for a lot of real estate investors. Is there room for retail in today’s shopping climate?

Yes, definitely.

Really?!

Absolutely. Being able to buy anything from home just means I don’t need to visit a brick-and-mortar retail location to make my purchases. So you need to get me there another way.

Related: 4 Ways Technology is Shaking Up Commercial Real Estate (& Why Multifamily Will Pull Ahead)

What’s that way? 

You need me as a consumer to be interacting with — and thinking about — your brand in a positive light. That can be done with experiences. Google has become a sort of sensation with its themed pop-up shops. I’m not wasting time and energy visiting a retail location to give my money to a brand unless there is a bigger benefit for me, such as Google’s recent Stranger Things pop-up. There are photo-ops, a real theme, and feeling that you’ve entered the world of stranger things.

Give me an example.

There’s no question in my mind that if Game of Thrones were to open a pop-up shop that I’d leave there with an overpriced, $8 turkey leg and a $1,500 suit of armor. I can buy all of these things online, but the experience is what would get me there and get me to use emotion to open my wallet and make purchases.

Tesla is another master at this. The first time I experienced it — and was sold on buying a Tesla — was in a mall. They rented a storefront, parked some cars, and placed one half-built Tesla in it, which allowed passersby to see the inner workings. It was a completely different experience than any other car dealership. It was memorable and it created brand loyalty before I even owned one of their products.

Do you think retail landlords can exist with this trend? What can they do to adapt where retail itself has failed to keep up?

Retail property investors can still exist, but like in every other faster-moving industry, they’re going to have to pivot. If you know the market is steering away from brick and mortar retail, steer potential renters towards in-store experiences. Offer shorter terms at higher premiums to attract pop-up shops, and offer additional services to help increase the bottom line. Focus on helping your customers be successful in their ventures.

Related: 5 Ways the Real Estate Industry Will Completely Transform Over the Next Decade

Investors with multiple locations in different regions can offer recurring seasonal contracts, and location changes or “tours,” allowing pop-ups and experiences to shift locations often to keep a fresh flow of revenue coming in.

How can retail and mall owners work with online shopping giants like Amazon, Ebates—even yourself?

Obviously online retailers hold a massive advantage over [brick-and-mortar] stores in terms of accessibility, 24-hour access to customers, and so forth. But many times they are missing out on the physical and emotional connection you only get with in-person experiences — just like I mentioned with Tesla.

Amazon has already begun steps to try to resolve this issue with their experimental Amazon Go store, a grocery store with no cash registers. You simply enter the store and the [Amazon] app tracks where you are and what you’re taking off the shelves. It’s automatically billed to your Amazon account and you’re free to go. It all goes back to the experience. And that’s where landlords need to look.

For full disclosure I am a minority shareholder of Sharebert. I decided to tell this story to give investors an idea on where retail is going, whether it’s feasible as a real estate investor, and, of course, to share a fellow entrepreneur’s story with the BiggerPockets audience. This interview has been edited for brevity and clarity. 

Where do you think the future of retail is going?

Share your opinions and predictions below!

About Author

Philip Michael

Philip Michael is a real estate developer, entrepreneur and investor. He’s the founder of NYEG, former on-air host on SiriusXM and NuvoTV, and former national editor/content strategy director at Bisnow leading up to the company’s $50M sale. Follow Philip on Twitter at @Philip_Michael or @yfwtb on Instagram. Real estate investment analyzer HERE: gum.co/AXdeluxe

16 Comments

  1. Mary Love

    This is a timely article. I am concerned about buying retail boxes. We will have to have new zoning laws and flexible ideas. I think the easy days or being an absent landlord are over. For our town of Asheville NC I hope we can take this opportunity to help with affordable housing and create mix use projects from these box store.

    • Agreed 100%. MOST commerce is still offline, but the speed at which that is changing is something that can’t be ignored. I try to always think about what people will be doing in 2 years and focus on that, because that’s how long it takes to make a real power move anyway. You’ll be right on time and ahead of the pack.

        • John Wallace

          One very good way to capitalize on the dysfunctions in the retail segment is through REITS.

          Wall Street does not appear to distinguish between what works and what does not in the retail sector very well–and if they do we don’t hear about it because they have often underwritten or acted as a lender to those companies. Any REIT holding covered malls, and many do, are dead to the Street, as they should be. I’ve done some looking at REITS that hold mostly neighborhood and strips, again largely food and service and daily needs, and in some cases the actual market value of the portfolio properties is 200-300 basis points higher than the REIT share prices, plus you get a decent to sizable dividend. Several are at, near, or slightly below book value. Public REIT owners are limited to 10% ownership and make a good part of their money through promotional and management fees, so they are not included to churn sell.

          I’m a developer and don’t usually buy improved properties, and when we do they are a long ways down from institutional grade, but if I were in the market I’d look strongly to the REITS over a fee simple owned asset, at least for now in the retail sector, when the bloom is low and gloom is high.

  2. Stephen S.

    I am all for progress and am thrilled to be living in this time. But this article re-raises a question I have been asking for years.

    “Where is everyone going to work?”

    Creating a gigantic underclass of unemployable people will not serve the US or the world well. And the innate nature of a corporation will always guide itself towards it’s own destruction – because it will ultimately destroy it’s customer base in the end. That is: if the corporation is left to it’s own devices.

    The long-standard “retraining” retort is nonsense – there were once huge numbers of people who loaded ships, stocked warehouses, and swept floors because they were not capable of higher-jobs. Those people still exist – but the jobs which suit their capabilities do not.

    Where is everyone going to work to accumulate the money required to shop in these clerk-less stores?

    PHM
    ————–

  3. Josh Collins

    @Steven s.
    I would say that jobs that haven’t been created yet will film that opening on the job market. I’m guessing horse salesmen didn’t think that car manufacturing jobs when horses were no longer needed. With that said, today’s talent is going to have to be as fast-learning and flexible as ever, however.

    In the end, I just don’t see future jobs looking very much like today’s job, good, bad, or otherwise.

  4. John Wallace

    I have been developing strip malls 5K – 30K SF for 40 years, and have never been more happy to be in the niche I am than today.

    There’s nothing wrong with the article, except most of the items sold in b&m stores that have given way to online shopping are comparison good, not convenience goods. I’m not up on all the latest technology, but I’m not aware of any online apps that drill your teeth, do your nails or hair, dry clean your clothes, make you a custom sandwich or pizza, or serve alcohol and apps while watching sports on TV.

    Those are our merchants, food and service, with very few exceptions, like auto parts, that still struggle with online because of shipping and delivery times, but they’ll probably figure that out. As far as dress shops, accessory boutiques, shoe stores, hardware–I cannot remember the last time I did any of those deals, and frankly, wouldn’t. If I believe any of my prospects would substantially compete with Amazon, Costco, or Walmart, I thank them for their time and suggest they rethink their business plan.

    About half our buildings are full, some with a waiting list, and we have a few “opportunities” as well, but nothing compared to the traditional anchored REIT-held properties, or power centers, even some grocery anchored centers that overbuilt. Local retail vacancy factors are around 4%. Cap rates are 6%. Help me understand how it gets any better!

    • Ali Mahvan

      John, your experience and expertise is definitely there. In fact, you’ve been developing strip malls for longer than I’ve been alive! Its seems you’ve found a great niche in focusing on industries that are necessary conveniences. As long as people are at the mall for ANY reason, they will need to eat. Groceries are another thing that will likely take another full generation or two to truly reside online. My parents and their friends, and probably even most of my generation will likely visit local grocery stores until the end of their lifetimes. Only my really tech savvy friends (and of course myself) order all of their groceries online, but they’re evangelists for sure. That said, almost everything you mentioned as not-being-available-online is already there. Some of it has been there for years and is already being refined and perfected.

      There are (funded) apps in healthcare that let you video chat with doctors on demand with specialization based on a survey of your ailments. The top 10 makeup channels on YouTube alone have amassed more than 100,000,000 subscribers. These are channels that provide a step-by-step tutorial to creating the latest trends in your own home. There are plenty of apps that offer dry cleaning pickup. Some of my friends don’t even have to dress themselves, as their clothes are selected, sized, purchased, and delivered by a personal online stylist on a monthly basis. This person knows your personality, style, and occupation, and selections are made based on those parameters.

      Food is easily the most disrupted industry currently. If you don’t have a good Yelp score, aren’t listed on Google/Apple Maps, or don’t offer online ordering, you’re missing out on massive business. Conversely, restaurants that are innovating on instagram, creating “instagramable-moments” are making a killing. One of my business partners just opened a small fruit bowl shop; it was the biggest grand opening his town had ever seen. Traffic was stopped, other stores couldn’t keep their doorways clear from the line, and pedestrians couldn’t walk down the sidewalk for a full block. People camped outside with tents to buy $12 fruit & bowls.

      Always get the money where it is already coming from, but definitely explore some smaller side investments in a future play. Amazon only took 20 years to become a behemoth that influences your core business model. Its very possible for something we can’t imagine yet to disrupt a similar industry in the same way.

  5. Michael Flight

    The death of retail is really overblown. Especially from guys pushing apps with a $3 million valuation. I am refinancing a center right now at a 50% LTV for $18 million.

    Do I think many things will migrate on line? Of course but it will be a while to maybe never before everyone does their grocery shopping on line. Amazon just bought Whole Foods. Are they going to close the stores or do they need a physical presence? Is Amazon really a bargain anymore when you have to pay sales taxes?

    And Wish (maybe they will) might think they will be bigger than Walmart but remember, Walmart beat Sears and Kmart by being an IT company and superior distribution company. They can hold their breath longer in a price war and have really started competing on line.

    Retail has always had changes and has always changed with new competitors replacing worn out merchants. Woolworth, Ben Franklin, GC Murphy (all dime stores), Replaced with Dollar Tree, Family Dollar and Dollar General. Service Merchandise and Radio Shack – replaced with Circuit City and Best Buy – who have been replaced by on-line. People still go to Best Buy to see the merchandise before buying on line.

    Amazon and other on-line merchants know they need multi-channel distribution: on-line, physical stores and the new strategy that comes next in two to five years.

    As long as you are not buying C malls things should mostly be OK. And some C malls will be great opportunities to redevelop into multifamily, call centers, mega churches, medial services or distribution.

    The low end and the high end are doing fine. It is the merchants in the middle that are having problems.

    • John Wallace

      Good summary, Mr. Flight. I would not touch any covered mall though, at least at a price that depended on income from the anchors and/or the shops. Those may be the worst kind of commercial real estate to hold now.

      We have found that financing our strips at 65%-70% LTV would be easy to obtain if we wanted it, but we don’t as we’re paying off debt as a first priority. As far as new construction financing, I’d imagine that would be very difficult to obtain at anything above 50% LTV. It wasn’t that long ago, mid 80s, when we’d easily borrow out with a construction loan, and have some walking around money from it too. I don’t miss those days of living off of construction loans, but that’s what it took to start building our portfolio.

    • Ali Mahvan

      You hit the nail on the head. “Imminent destruction” is not the best way to describe the industry’s goings. That said, the ship is slowly sinking as the primary means of commerce, and as you mentioned, cross-channel becomes the primary means. That means consistent online, mobile, and in-person experiences.

      Millennials are doing more online shopping then their parents, but still primarily shop offline. (Average annual online spend is only around $2,000). Gen Z on the other hand is growing up in a world where all of their social interactions are online. They’re still in high school, and everything from prom proposals to bullying is occurring online rather than in person. These are people that are finding and making their fashion purchases through instagram accounts (that’s not even a joke).

      As this generation hits their 20’s, a massive surge to primarily online transactions can be expected. Anyone who caters to that market first is going to be a big winner, especially those brands that are creating destination experiences that users can interact with online when they get home. Of course, this doesn’t mean that everyone who doesn’t pivot is going to sink, but it likely does spell the end for those weaker ones that are struggling now.
      (see Retail Apocalypse from BI: https://tinyurl.com/yb3kurcg)

      There will always be deals out there, but only the most aggressive, and most experienced “hunters” know how to get access to those deals first. Anyone picking up the scraps better get ready to innovate, and fast.

      • John Wallace

        ” If you don’t have a good Yelp score, aren’t listed on Google/Apple Maps, or don’t offer online ordering, you’re missing out on massive business. Conversely, restaurants that are innovating on instagram, creating “instagramable-moments” are making a killing. One of my business partners just opened a small fruit bowl shop; it was the biggest grand opening his town had ever seen. Traffic was stopped, other stores couldn’t keep their doorways clear from the line, and pedestrians couldn’t walk down the sidewalk for a full block. People camped outside with tents to buy $12 fruit & bowls.”

        *SIGH*, ya. I know. And I’ve tried to instill in my restaurant tenants, especially, the extreme value of using social media as you described, and for the most part, they don’t. In one of our centers, I gave specific instruction on how to get their location and phone number listed on Google Maps. That started in 2005. Today, there is one–mine. And we have like 40 reviews on Google, but few are more than a star rating. And, they’re fine, 4 star average, no negatives at all. Still, not enough comments to interest most people because no one has asked them to do it.

        It’s generational. I have maybe 30 restaurant tenants, mostly small, and I’d guess two of them spend a dime on advertising or engage through social media. They stay in business because they have to, not because of raging success for the most part. I have three generations now, nearly all foreign born. The older group does absolutely nothing. The group in their late 30s-40s might have a Facebook Page and post “10% off between 3:pm – 3:10pm today only, cash only, no coupons, limited menu, no take outs, etc. The younger group in their 20s is starting to get it! They do much better than the others, and will use FB and Instagram on occasion.

        I’m no tech wizard, but I know how to create something reasonably viral. I’ve passed it on to all of them, and as above, with not much luck. I’m an active landlord, I think I’m fair, and the tenants like me because I’m really on their side to make a good go of their business, but it’s extremely frustrating that most don’t even try.

        • Ali Mahvan

          You’re absolutely right. It’s generational. While they can survive for now, they’ll definitely see volume decrease over time. That’s just the way markets work.

          The old have to die so the new can take their place. Only the very successful and most popular older brands will survive until the bitter end. Toys ‘R Us, Sears, even diners here in New Jersey. Just 10 years ago would you have thought anyone could put Walmart out of business? While their death isn’t imminent, Amazon definitely keeps them looking for options. They went from the largest retailer of all time to “looking for options” in 10 years.

          There is room there for growth. Retail spaces aren’t going to evaporate from this Earth, but its going to take innovation and some creativity to keep the river flowing.

        • Ali Mahvan

          Your tenants are lucky to have someone who’s willing to put themselves out there and offer guidance. I have a few friends in commercial, and they won’t even touch a tenant that doesn’t have a strong, engaged social media following. It’s crazy.

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